EU ‘Flip-Flopping’ Over Shorting Ban Stokes Investor Anger

By Ben Moshinsky -
Aug 24, 2011

European Union regulators that
banned short-selling this month risk sapping investor confidence
in the region because the rules lack clarity, lawyers said.

Traders are “pulling back on long positions because of
concerns about damage that the bans are doing to liquidity and a
general lack of confidence in European regulators to act
rationally,” Darren Fox, financial services lawyer at London-
based Simmons & Simmons LLP, said in a telephone interview.

France, Spain, Italy, and Belgium this month imposed
temporary bans on short selling of some financial stocks in an
effort to stabilize markets after European banks including
Societe Generale (GLE) SA hit their lowest level since the credit
crisis of 2008. The Stoxx 600 Banks Index has fallen 5.8 percent
since the four countries bans were enacted on Aug. 12. Greece
imposed a similar ban on Aug. 8.

Fox said regulators angered investors by “flip-flopping”
on details of the bans such as allowing short positions on
indexes that were in effect before the ban to be replaced with
new contracts. The four countries made changes to their bans on
Aug. 18.

“The whole thing is a farce,” Fox said. “We’ve had to
set up a twitter feed. The situation changes so quickly that
it’s a good way of disseminating information to clients fast. In
terms of inquiries, we’ve had hundreds of e-mails a day.”

Short sellers sell borrowed shares with plans to buy them
back later at a lower price, a practice politicians and some
investors blame for roiling markets. In a naked short-sale,
traders agree to sell a security that they have not already
arranged to borrow.

The patchwork of short-selling bans “is an early
demonstration of one the problems with ESMA’s structure,” Simon Gleeson, a financial regulation lawyer at Clifford Chance LLP in
London, said in a telephone interview. “What is proposed is
that ESMA should coordinate the national regulators. This is
only useful if the members are prepared to be coordinated.”

Michel Barnier, the EU’s financial services commissioner,
proposed legislation last year to rein in short-selling and give
ESMA the power to ban the practice in crisis situations.

The plunge in European bank stocks this month showed the
need for tighter restrictions on so-called naked short-selling,
Barnier said.

‘Gray Area’

“At the moment ESMA is in a bit of a gray area,” Fox
said. “They’re trying to broker the peace because some of the
bans are extra-territorial in nature and have impacts on markets
in other jurisdictions.”

Market volatility that included the biggest decline in some
lenders’ shares for almost 2 1/2 years “should be a clear
call” for legislators to conclude the negotiations on a law
quickly, Barnier said last week. ESMA declined to comment.

The measures, which concern both naked and non-naked short
selling, need to be approved by a majority of national
governments in the 27-nation region and by lawmakers in the
European Parliament before they can enter into force. Their next
negotiation session is scheduled for Sept. 6.

“My feeling is that it was always unrealistic to expect
any pan-EU ban on short selling,” Richard Reid, director of
research with the International Centre for Financial Regulation,
said in an e-mail. “Partly this is because some countries
regard such a move as being seen as panicky and risk even
contributing to the mood of uncertainty.”